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Pound Sterling to Euro Falls on Construction Slowdown despite EU’s Italy Budget Woes

Pound Sterling Currency Forecast

Pound and Euro Battle (GBP/EUR) it out as Poor Data and Political Jitters Compete for Supremacy

The Pound is competing with the Euro this morning over which currency is the least attractive to investors, as poor data and Brexit jitters emanate from the UK in answer to the EU’s wrangle with Italy over its austerity-busting budget.

According to figures published this morning by IHS Markit, growth in the UK’s construction sector cooled in September, with the PMI sliding from 52.9 to 52.1.

A consensus of economists had predicted a drop to 52.5, but the actual figure of 52.1 was the lowest since stormy winter weather caused a contraction in growth in March.

In the report accompanying the figures it was revealed that ongoing uncertainty surrounding Brexit continues to cast a shadow over the UK construction sector, with companies unwilling to commit to infrastructure projects while the UK’s future relationship with the EU remains uncertain.

Tim Moore, Associate Director at IHS Markit outlined their concerns:

‘The latest data showed that overall confidence about the year-ahead business outlook was among the lowest seen since the start of 2013. Construction companies continued to note that political uncertainty acted as a key drag on decision-making, with Brexit worries encouraging a wait-and-see approach to spending among clients.’

Italian Drama Continues to Unfold as Draghi Warns Italy Could be ‘The Next Greece’

Although the Pound was brought lower against most other currencies following the construction PMI, it managed to hold up better against the Euro as some similarly unsettling developments depressed EUR.

Since the news that Italy’s coalition government had passed a budget that breaks the EU’s 2% of GDP limit, sentiment towards the single currency has remained weak.

Referencing the Italian situation, European Commission President Jean-Claude Juncker warned that ‘One crisis was enough,’ adding ‘after the toughest management of the Greece crisis, we have to do everything to avoid a new Greece – this time an Italy – crisis.’

Meanwhile Italy’s Deputy Prime Minister Luigi Di Maio fired back by accusing Brussels of ‘bringing terrorism to the financial markets.’

His remarks will do little to calm investors in either the currency or the bond markets, which have also been hit by the uncertainty, with the likelihood of a clash between Rome and Brussels making EUR investors increasingly nervous about the shared currency.

GBP/EUR Exchange Rate Outlook: Political Uncertainty and UK Services PMI Could Cause Movement

Later today, former UK Foreign Secretary Boris Johnson is due to speak at the Conservative Party conference in Birmingham. As a harsh critic of Prime Minister Theresa May’s Brexit plans – and a possible stalking horse for the leadership – investors will be listening closely to his words and watching the reaction of delegates.

If it looks as though Johnson has the support of a majority of the delegates this could indicate a leadership challenge is imminent, which would likely knock back GBP/EUR.

Looking ahead, the GBP/EUR exchange rate looks poised to weaken tomorrow as the UK publishes its final September private sector survey in the form of the services PMI

Services account for the majority of economic output in the UK economy, so any weakness here will be seen as weakness for the economy as a whole.

Currently, analysts are forecasting that the PMI will disappoint Pound investors, so we can expect to see some losses in GBP/EUR tomorrow and perhaps for the rest of the week.

Further adding to Sterling’s shaky outlook this week will be the release of the Eurozone’s latest retail sales figures, with forecasters currently predicting that August’s figures will show a rebound in sales growth across the bloc.